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Old 09-07-2021, 10:32 AM   #21
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Out-to-Lunch-specifically, a long term facility can go after Roth IRA funds, IRA distributions but not the actual fund, SS, pension and other sources of income as I understand the information to date for lack of payment.
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Old 09-07-2021, 10:57 AM   #22
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We will both be 64 this year and into our 2nd year of retirement. Just met with our Accountant to review if we should convert our Vanguard IRAs to Roth IRAs. The value will be about $1.15 million next year and $1.5+ at 71.


Was expecting to convert 100% next year as we only took a 2.5% withdrawal this year keeping us in the 12% tax bracket. Our Accountant suggested only a 25% conversion to reduce taxes and avoid exposure to LTC industry in the future as the entire Roth fund is exposed. We currently have 5 years of self financed LTC that would last longer with in-home care should that be practical. Once we are on Medicaid we must make sure that any overnight hospital stays are under "admitted" status only for additional health & LTC benefits. Currently we are both healthy to date. While RMDs are exposed to the LTC industry we understand the main IRA fund is not. We also have $1 million in cash which we plan to create a new account at Fidelity with about $200K initially to start a new income stream. We have no debt and SS/Pension pay all bills including health care and 40% of discretionary spending.



To convert 25% next year would cost about about $55K. If we avoid the 25% Roth conversion then the first RMD at 72 would be about $53K and result in about $11,660 tax assuming 22% tax bracket.



We need to update our will and will be discussing potential of a trust to avoid some TLC exposure and protect the transfer of our assets to our daughter when we pass.



Starting to think Roth is not the end all and that creating a trust will start to complicate our retirement especially in later life. We need to up our withdrawal rate anyway to avoid too much money in our 80s and would reduce RMDs. Thinking that just staying with IRAs would be easier.


Thoughts?
@StillLearning Roth conversions offer no benefit, or a very small benefit very late in life, for most people. McQuarrie is one author on this topic.

Use the search feature on this site and you will see extensive discussion on this topic.

My suggestion is don’t do Roth conversions because there is little or no benefit. It’s a chase after the wind and needless machinations of one’s financial accounts. My own home grown excel model agrees with McQuarrie as does the vaunted RPM spreadsheet.

Anecdotally, I have asked UHNW individuals in my circle, and a family office trustee (UUHNW clients) and none of these people are doing Roth conversions for themselves or their clients.

What prompted the idea to explore Roth conversions?
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Old 09-07-2021, 11:26 AM   #23
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chassis - thanks for your thoughts. I started checking into Roth IRA conversions due to our current low tax bracket and to simplify life for my wife if I pass first. No thought to avoid taxes/other costs although I do like to pay minimum.
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Old 09-07-2021, 11:34 AM   #24
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Out-to-Lunch-specifically, a long term facility can go after Roth IRA funds, IRA distributions but not the actual fund, SS, pension and other sources of income as I understand the information to date for lack of payment.
From whence did you learn this information?
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Old 09-07-2021, 11:39 AM   #25
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From whence did you learn this information?
https://www.elderlawanswers.com/can-...gibility-14544
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Old 09-07-2021, 11:40 AM   #26
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pb4uski -sorry for the typo. Will be in the 22% bracket at 72
Ive got maybe a stupid question as it relates to Roth conversions. What if, for whatever reasons, you're income puts you in the highest tax bracket? I keep reading that it makes sense up to 22% brackets, but what if a persons is still working or has structured deferred income that puts them well over 22% for the net 10 years. That is my case and I don't see where a Roth Conversion would help. Am i missing something?
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Old 09-07-2021, 11:41 AM   #27
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From whence did you learn this information?
+1. New to me too.
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Old 09-07-2021, 11:47 AM   #28
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@StillLearning Roth conversions offer no benefit, or a very small benefit very late in life, for most people. ...
OP, I don't agree with chassis that Roth conversions offer no benefit.

In your case they are beneficial,be because you can take advantage of your current 12% tax rate 22% later on. In other cases, if you were already in 22% with no conversions vs 24% later, then the benefits are negligible.
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Old 09-07-2021, 11:52 AM   #29
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Thanks for the link to the article. I was able to find a number of others that said essentially the same thing.

If you're concerned about LTC costs and are relying on this plan to go on Medicaid, why have you not just bought an LTC insurance policy? It might be expensive, but it would presumably preserve your assets for your daughter and have the hopefully added bonus of not being on Medicaid.

I'm not really trying to advocate for any particular path here. Mostly just curious about your thought process.
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Old 09-07-2021, 12:02 PM   #30
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Ive got maybe a stupid question as it relates to Roth conversions. What if, for whatever reasons, you're income puts you in the highest tax bracket? I keep reading that it makes sense up to 22% brackets, but what if a persons is still working or has structured deferred income that puts them well over 22% for the net 10 years. That is my case and I don't see where a Roth Conversion would help. Am i missing something?
The main benefit to Roth conversions is to pay a lower rate to convert than you'd be paying when you withdraw later, whether forced due to RMDs or just withdrawing for living expenses. So if you are working or have other income that puts you in a higher bracket now than what you expect later, you almost certainly don't want to convert.

And there's not a generic rule that says it makes sense to convert up to 22%. For some it will be to the top of 12% or to the point where qualified dividends would be taxed. Or not at all, especially if you are getting ACA subsidies. In fact my thought is that if you are converting to the top of 22%, you might want to go to 24%. This helps you make real headway on reducing your tIRA, and the 22% rate is scheduled to return to 25% in 2026.

Bottomline, everyone's case is different, and you shouldn't apply advice given for one situation to yours, without really understanding if that makes sense. Plus not everything stated in these threads is good advice at all.
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Old 09-07-2021, 01:34 PM   #31
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What got me into this question of LTC exposure was learning that ROTH IRA funds are just as exposed as savings, SS, pension, stocks and other income producing sources........I am still learning........... that retirement IRA funds are not, beyond withdrawals and RMDs. So just started investigating trusts again and still find them to be a bit complicated and only partially successful based on legal websites pending our first consultation with an elderly care legal firm. We should be able to self fund what we eventually need.

Believe the overall concept of converting to Roth IRAs makes sense for us. Currently in the 12% tax bracket vs 35% when working and 22% in a few years time as our income stream from current and new investments continue to increase.
Note you must already be taking distributions from them for traditional retirement accounts not to be counted as an asset:

"Medicaid will count your IRA or 401k as an available source of funds to pay for your care, unless it is in payout status. 'Payout status' means that you are taking at least the required distribution out of your plan on a monthly basis. If your IRA account is in payout status, the monthly payment will be counted as income, thereby impacting the Medicaid income limits."

https://www.kobricklaw.com/can-medicaid-take-your-ira/

Medicaid will come after your estate to recover LTC costs so be sure those accounts have a named beneficiary other than your estate.

EDIT: NY does not go after anything other than the probate estate after a Medicaid recipient dies.

So assets held jointly with right of survivorship or held in a living trust are not subject to Medicaid recovery after death.

However, when applying for Medicaid in NY there are limits on how much you & your spouse can retain (including jointly held assets & those in a revocable trust) plus income limits:

https://www.medicaidplanningassistan...lity-new-york/

Unless there's specific NY law that protects revocable trusts, an irrevocable trust would normally be needed to protect assets above those limits, but those are not cheap to setup & maintain...e.g. an independent trustee, not you or your spouse, controls distributions via the terms of the trust & the trustee usually is compensated for that trouble.

Final thought:

If you've already taken steps to self-fund 5 years of LTC (each?) I doubt you'll have to worry about any of the above.
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Old 09-07-2021, 02:13 PM   #32
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@StillLearning

I see posts on this thread supporting Roth conversions generally. And the posters explain how they work, in other words the mechanics and the theory.

But what you don’t see, and you should ask for, is for the precise benefit received by people who have executed Roth conversions. How many dollars of benefit, by what date (age) did the Roth conversions provide? And what percentage of net worth were the benefits? This information is absent from posts I see on this site.

Supporters of Roth conversions generally post, “Do it, this is how it works.” Rather than posting, “This is how many dollars Roth conversions have benefited me, and it was material to my net worth by xyz%”.
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Old 09-07-2021, 02:41 PM   #33
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@StillLearning

I see posts on this thread supporting Roth conversions generally. And the posters explain how they work, in other words the mechanics and the theory.

But what you don’t see, and you should ask for, is for the precise benefit received by people who have executed Roth conversions. How many dollars of benefit, by what date (age) did the Roth conversions provide? And what percentage of net worth were the benefits? This information is absent from posts I see on this site.

Supporters of Roth conversions generally post, “Do it, this is how it works.” Rather than posting, “This is how many dollars Roth conversions have benefited me, and it was material to my net worth by xyz%”.
Apparently you're overlooking my reply to your similar request on another thread:

https://www.early-retirement.org/for...ml#post2637108

As for age, I turned 52 and expect to do Roth conversions every year until I am 72, so one can take the numbers in the above reply and multiply by 20. Oh, and I've already been doing Roth conversions for 5 years, so it's probably more fair to multiply by 25.

As far as percentage of net worth, my policy is to never disclose absolute net worth or income figures for privacy reasons. But if I mention that my net WR% is about 1% of my FIRE stash, you or anyone can probably do some math to get a rough idea of the size of the tax benefit relative to my FIRE stash, which is not my net worth but is in the same ballpark magnitude-wise. My math shows it'll probably be about 8.3% of my net worth (4 months savings / 12 months per year times 1% net WR * 25 years).

I suppose you can argue technicalities with me on whether my post meets your criteria here. Go ahead if you like, but I won't engage with you in that manner.
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Old 09-07-2021, 05:30 PM   #34
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My Roth conversion value proposition is pretty simple. We've been living off of taxable account money since I retired at the end of 2011 so absent Roth conversions, our income would be less than the standard deduction so our tax without Roth conversions is $0.

When I am subject to RMDs at 72, between SS, pension, taxable account income and RMDs we'll be in the 22% tax bracket and if I hadn't done any Roth conversions then we would have been even deeper in the 22% bracket. Over the past 10 years, I've converted almost 1/2 million and paid about 9% on average... a mix of 0% (covered by unutilized standard deduction), 10% and 12%.

So let's say if I hadn't done any Roth conversions that I would have paid 20% on RMDs (part 15% and part 25% assuming that tax brackets sunset as in current statute)... I'm paying 9% now to save 20% or more later... I'm ahead by ~11%.

The math is so simple even a caveman can do it and I don't need a complex model through age 90 to prove the obvious.

But actually, I do have a model through age 100 and if I compare my age 100 projected net worth with Roth conversions vs with none, my net worth is 7% higher with Roth conversions. But that is only counting Roth conversions for 2020 onwards. If I adjust for the Roth conversions that I did prior to 2021, Roth conversions will increase my net worth by almost 20%. I concede that the 20% is a broad brush estimate, but even just the 7% makes it worthwhile.

Now keep in mind, I think it is beneficial in our situation because I'm trading paying tax at 0%, 10% and 12% today to avoid paying 15% or 25% tomorrow. If we were already solidly in the 22% tax bracket and it was a 22% now vs 28% later tradeoff then I think it would still be beneficial, just substantially less so.

From what the OP wrote, they are in the same sweet spot that we are... 12% now vs 25% later.
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Old 09-07-2021, 05:45 PM   #35
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My Roth conversion value proposition is pretty simple. We've been living off of taxable account money since I retired at the end of 2011 so absent Roth conversions, our income would be less than the standard deduction so our tax without Roth conversions is $0.

When I am subject to RMDs at 72, between SS, pension, taxable account income and RMDs we'll be in the 22% tax bracket and if I hadn't done any Roth conversions then we would have been even deeper in the 22% bracket. Over the past 10 years, I've converted almost 1/2 million and paid about 9% on average... a mix of 0% (covered by unutilized standard deduction), 10% and 12%.

So let's say if I hadn't done any Roth conversions that I would have paid 20% on RMDs (part 15% and part 25% assuming that tax brackets sunset as in current statute)... I'm paying 9% now to save 20% or more later... I'm ahead by ~11%.
The math is so simple even a caveman can do it and I don't need a complex model through age 90 to prove the obvious.
@Chassis - you now have a real life math example. The actual work involved in the process is also simple. Only ACA subsidies are preventing me currently from Roth converting.
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Old 09-07-2021, 05:46 PM   #36
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McQuarrie is one author on this topic.
An author with dubious credentials on the topic of Roth conversions. See my post:

https://www.early-retirement.org/for...ml#post2625341

Kitces, an author with better credentials on the topic of Roth conversions (see https://www.linkedin.com/in/michaelkitces), appears to disagree with McQuarrie. See for example:

https://www.kitces.com/blog/tax-rate...h-conversions/
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Old 09-07-2021, 05:57 PM   #37
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@pb4uski I don't see that you are accounting for the growth of that money you have given up to pay taxes. The growth of that money that you no longer have, could account of the $ difference in the tax rate of now vs. later.
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Old 09-07-2021, 06:03 PM   #38
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Apparently you're overlooking my reply to your similar request on another thread:

https://www.early-retirement.org/for...ml#post2637108

As for age, I turned 52 and expect to do Roth conversions every year until I am 72, so one can take the numbers in the above reply and multiply by 20. Oh, and I've already been doing Roth conversions for 5 years, so it's probably more fair to multiply by 25.

As far as percentage of net worth, my policy is to never disclose absolute net worth or income figures for privacy reasons. But if I mention that my net WR% is about 1% of my FIRE stash, you or anyone can probably do some math to get a rough idea of the size of the tax benefit relative to my FIRE stash, which is not my net worth but is in the same ballpark magnitude-wise. My math shows it'll probably be about 8.3% of my net worth (4 months savings / 12 months per year times 1% net WR * 25 years).

I suppose you can argue technicalities with me on whether my post meets your criteria here. Go ahead if you like, but I won't engage with you in that manner.
I realized I made two mistakes in the above.

First, I rounded down from 4.11 months to 4 months.

Second, I used net WR% instead of gross WR%. My gross WR% is currently 1.96%.

So the actual FIRE stash benefit is 4.11 / 12 * 1.96 * 25 ~= 16.8%.
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Old 09-07-2021, 06:12 PM   #39
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Can someone breakdown this “Mega back door Roth conversion” for me?

My wife and I fit into a category where this may make sense, and I’m not sure I quite follow how I avoid paying addition income tax on this?

Article: https://www.morningbrew.com/money-sc...door-roth-c4ad
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Old 09-07-2021, 06:16 PM   #40
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Can someone breakdown this “Mega back door Roth conversion” for me?

My wife and I fit into a category where this may make sense, and I’m not sure I quite follow how I avoid paying addition income tax on this?

Article: https://www.morningbrew.com/money-scoop/stories/2021/09/07/whats-megabackdoor-roth-c4ad

Are you looking to do a), b), or c)?

a) Roth IRA conversion
b) Backdoor Roth
c) Mega-backdoor Roth
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